Can Eurozone Countries Actually Follow Their Own Rules This Time?

December 7, 2011

When the euro was set up in the late 1990s, the Stability and Growth Pact clearly spelled out the criteria for membership: Countries could not have huge debts, and they needed to keep deficits small. And there was no question — the rules explicitly excluded a little country named Greece.

“If you asked someone in Europe whether Greece would join the eurozone, the answer would have been you are mad, ” says Loukas Tsoukalis with the Hellenic Foundation for European and Foreign Policy.

Tsoukalis advised the government on the benefits of euro membership. Because, like most anyone excluded from a club, the Greeks wanted in.

“We have to make an effort to meet the criteria because we absolutely have to be in,” Tsoukalis says. “And it worked.”

In just a few years, Greece seemed to get its house in order. The country made unbelievable strides in its financial data to meet the criteria. Truly unbelievable. Did anybody believe them?

“No,” says Jacob Kirkegaard with the Peterson Institute for International Economics.

But the euro was supposed to be about unity. Countries were saying we are mature, civilized European nations with strong financials. Kirkegaard says no one wanted to stand up and say to Greece — “you are lying.” Also, Kirkegaard says there were a lot of comparisons to Sweden popping up in those those meeting rooms — as in, we’re all Swedes now.

“When that is the self-identity, all of a sudden standing up to one member of this club that look actually, you’re dirty, well they’re gonna turn around and say what about yourself?” says Kirkegaard. “You know, who is to say if you can’t trust the Greeks can you really trust the Italians?”

Because, really, once you asked that question, the answer was likely to be no.

“Italy also engaged in a number of — let’s put it this way — very creative accounting measures to reduce its deficit below the 3 precent limit,” says Kirkegaard.

The nations of this new, distinguished group sealed the deal. And they spent the next many years repeating — it sure is a good thing we have these rules.

Meanwhile, Kirkeggard says, pretty much everybody broke the rules, including France and Germany.

This week, in meeting rooms in Paris, Berlin and Brussels, European leaders are sitting down once again and asking that question: How do we enforce the club rules? But this time, they are doing it out loud.

Given that just uttering those words was too scary to even do the first time around, it’s not likely to be an easy question to answer

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